Pay of debt or contribute to savings?

[thisorthat12345]

So me and DH have a fair amount of debt to pay off, 24k......
This includes personal loans, car, home improvement loans.
We are keeping up with all monthly payments but is could be going on for the next 5/6 years, and it is a lot of money each month.
We are trying really hard to limit spending on luxuries or unnecessary items and putting money away to save.

Do you think it would be more sensible to try and pay as much debt off as possible and become debt free earlier, and then focus on savings.

Or continue to pay our monthly payments and save the additional money?

We don't currently have any major savings

Thanks in advance! 🙏

What is your take home income for that amount of debt OP? It is helpful to then see if there is enough for both.
An emergency fund is a really good idea so you’re not creating more debt if the washing machine etc breaks so a little bit of savings is good combined with paying the debt down as quickly as possible. Don’t forget home improvements will hopefully have added to the value of your house so hopefully not dead money!

@SandysMam thanks for your reply :)

Take home pay for us both come to around £3200 and about £1000 of this going towards paying the debts off.

That is a good point about the home improvement, we are hoping to move in 4/5 years time, which is another reason I'm leaning towards trying to become debt free.

We have a buffer fund of around 1k incase anything breaks!

Thanks

Pay off the debts.

You won't get any kind of return on savings at current rates so you are better off reducing the interest you pay on debts.

I usually have an interest free credit card open just in case I need money in an emergency. That way I don't need to keep cash on hand and can focus on reducing the interest I pay on my debts.

In that case I would really focus on the debts. Each month try to pay off a bit more. So 1200 this month, 1300 next month then really really hitting it as hard as you can. At least there are no holidays and days out going on at the moment so not missing out on anything!! You will feel so good when that debt is paid off!

Depends on the interest rates on the debts. Consider the snowball method.

Pay off the debts shard and as fast as you can. Give yourselves LITTLE breaks (ie one month not paying extra) at fixed points in the journey towards being debt free (eg at 22k, 20k, 15k, 10k etc).

Debt advice is always to save a buffer and then pay down your debts; pay the highest interest first, keeping the others on minimum payments , when highest is done move onto next highest and so on. ( not counting mortgage debt) and then start saving/investing. It’s the best feeling in the world when you pay off the last one. Sadly for me I started a new business and racked up a load of debt which I’m now shovelling every spare pound into.

Pay the debts. Interest on savings at the moment is just zilch, and it will be great to get to having that extra £1K PER MONTH !!! in your pocket, sooner.

You have a £1k emergency fund, so I would pay off the debts with a view of being free of the personal loans and car debt before moving. Ideally the home improvement loan as well but that will get repaid as part of the house sale I expect... is it linked at all to the mortgage?
Before moving I would bump up the emergency fund as costs of moving often seem to be more than anticipated.

I used this financial plan to help with paying off debt. It's American but the steps work anywhere.
www.daveramsey.com/dave-ramsey-7-baby-steps

Thanks all for the advice.

Very true regarding the interest rates for savings being terrible atm!!

And yes, the thought that that extra £1000 per month could be disposable income is just amazing!...

We both work hard so it would be lovely to finally get out of these debts and enjoy our earnings!

@PerseverancePays i hope things go well with your business and you too are able to get your debts sorted and enjoy the fruits of your labour :)

@nannynick thanks for that we will take a look :)

Home improvement is separate to the mortgage.

I think we will focus more on trying to get our debt down/gone and then increase our savings pot from there.

What are the interest rates on your debts?

If you pay off £1,000 per month, and you owe £24,000, without interest you’d be debt-free in 2 years not 4-5.

So are some of your debts at higher rates? Tackle those first. Have you run them through a calculator like mobile.whatsthecost.com/snowball.aspx

It will give you suggestions on how best to attack them.

How secure are your jobs?

@NoSquirrels our longest loan lasts for 5 years, and then between now and then others will be paid off so the amount we pay will get lesser and lesser if we continue with the minimum payments as we are now.

Thanks for the link 🙏

Debt Payoff Planner app (iOS and Android) is also good for seeing how your payments to debts affects the time it takes to pay off. You can also see difference between using Snowball (smallest to largest) to Avalanche (highest interest to smallest interest) methods.
The app does have a paid version but the free version is enough, just need to create an account.

I'd vote for 50-50 savings and debt based on my own experiences. When times were good I focused on debts 100% as per snowball method but then when times were unexpectedly hard (thank you paye tax error!) I had no reserves to draw on (you can't get back those car/mortgage overpayments etc).

I would always focus on paying off debts, as you pay interest on debts but are hardly earning any interest at the moment with rates so low. If the only debt you have left is a mortgage, then it is advisable to keep a balance of easy access savings rather than pour every penny into your mortgage.

Providing your credit is ok, or you already have a credit card that isn't maxed out I would aim to pay off debts first as interest rates for savings are so poor compared to borrowing.

I would keep that £1000 for emergencies and top it up if you use any of it. Also keep a credit card for emergencies. Focus the rest of your efforts on paying off debts but be smart about how you do it, so check interest rates and early payment clauses etc.

Generally you need to focus on credit cards and overdrafts first while just paying the minimum on loans but it isn't always the case.

Thanks @Lexilooo luckily we don't have any credit cards or overdrafts so there's one positive!!!